Independent Thinking in Trading

22 09 2007


Independent thinking – separation from the opinions, surmises and suspicions of other people, however friendly and able they may be – is a vital key to trading the general market swings. You must go by your own meaning of the facts you observe. This is the only way you will bump up against the truth. Only through this process do you gain confidence in that events, and not vanity, proves that you can read the tape well enough to win. With this insight, one is also able to remain distant and objective even when the market unexpectedly, or even illogically goes against your position.

One should let their mind dwell on the general market that one is trading in, bull or bear, then put into practice a method of anticipating probabilities. One drawback is that one has to have a trading stake large enough to trade this way.

Once he started looking at the general market outlook, he was no longer satisfied merely reading the tape and ceased to be concerned with the daily fluctuation of individual stocks. In sizing up the general market, Larry spoke of the value of the daily dope, or the news off the wire. At every angle he gave them low marks, but pieced the news together himself. He looked to where the money was flowing in the economy of the world at the time and gives picture that we see, in hindsight, see to be a prophetic crystal ball. A major bear market was in the developing stages and he could see nothing to prevent it.

Larry outlines his expectations, his trades, his losses, another attempt, another loss and another quick covering of his short positions…losing money. Each time the market showed weakness, as he correctly foresaw, he would put out a large line, only to have the market continue to advance… While outlining the actions he took, Larry adds hindsight to his commentary to reveal the mistakes that were his undoing. At the time he could only see the inevitable – the sure trade, and it lead to another financial ruin. He was forced to get credit from his brokerage firm.

Now, after a series of spankings from the market, he was less careless – he simply had to be sure this time. In retrospect, Larry points to this as the first campaign along the lines that he had followed since. He waited and sold more intelligently. A little of this, a little of that on more weakness. The whole list was soft as mush. Then, on a small rally, he recalls the advice and beliefs of others. And begins to observe their rationalizations, but can ignore them because he still sees the general market direction. In his selling, he speaks of seeking out the weaker ones and letting them have it. I think he refers to using relative strength on charts, or technical analysis. However, even the stock showing weakness last will have to follow if the underlying conditions prevail against it, just don’t become impatient.

Once the market broke, Larry added to his winning positions using the method of placing bets as outlined in Chapter VII.

Larry introduced his method of testing the market for confirmation before putting on his full position, so the reader would more clearly recognize the damage – the avoidable damage – that poor risk control did to his trading stake.

Once his timing was correct, and he added on his correct assumptions, he made great profits! When the move had lost it’s momentum, Larry liquidated, took a vacation and gave the markets no thought for some time.


Buy on a rising market

9 09 2007

Starting with the average man’s perspective on picking individual stocks, Larry moves to emphasize a general market perspective as a more sound, but more difficult way to approach trading. The fundamentals of stock trading require a system of placing your bets, so-as to minimize risk. Buying on a rising market is the most comfortable way of buying stocks. He explains that when he is bearish and he sells a stock, each successive sale must be at a lower price than the previous. The reverse is true in a bull move. The system of how to put on a full position requires the position to prove itself correct before building a complete position.

The story that follows of Deacon S.V. White and his dialogue with an excited informant is another great one.

 It is the classic mental game that every trader must recognize within themselves; the conversation between calm appraisal and emotional excitement.

The old and wise trader speaks softly and asks open ended questions. He in not ruffled by the intensity of the informant’s belief in the tip he has brought along and does not become angry in retaliation – even when the tipster lost emotional control and started lashing out at old Deacon. Mr. White, goes to the market for confirmation of the tip, first testing to see if there is a lot of buying pressure – by selling and watching the tape for the market’s reaction – then covering his shorts and taking a long position. Instead of acting blindly on the tip in the rush of emotional certainty, he confirms by observing the market itself.

Larry closes this chapter re-stating that in starting a movement, it is unwise to take on your full line…and… after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch – much depends upon beginning at exactly the right time.